On April 13, 2018, the Republican-controlled Kentucky House and Senate voted to override Gov. Matt Bevin’s (R) veto of a sweeping tax bill that includes conformity for tax years beginning on or after January 1, 2018 to the IRC as in effect as of December 31, 2017, institution of a flat corporate tax rate, adoption of a single sales factor apportionment formula and market-based sourcing, and a broad expansion of the sales tax base and definition of a retailer engaged in business in the state.
On April 26, 2018, HB 487, a tax cleanup bill was filed without the Governor’s signature with the Secretary of State. The legislation, which is now considered law, addresses additional tax changes, including the adoption of a mandatory water’s edge combined reporting regime for tax years beginning on or after January 1, 2019.
For the 2017 tax year, Kentucky continues to conform to the IRC as of December 31, 2015. As a result, it appears Kentucky will not recognize Section 965, the deemed repatriation toll charge, for the 2017 tax year.
For the 2018 tax year, Kentucky updates its conformity to the IRC as of December 31, 2017. Kentucky has a broad dividend income exclusion and historically has treated Subpart F income as a dividend. While Kentucky does not allow deductions contained in IRC Sections 243, 244, 245, and 247, the Bill did not decouple from IRC Section 250. One question, therefore, is whether Kentucky will consider IRC Section 951A GILTI income as an excludable dividend and, if so, whether the deduction will be a ‘net’ amount calculated after the IRC Section 250 deduction, to the extent it applies.
In addition, the Bill did not decouple from IRC Section 245A, the deduction for foreign source dividends made after December 31, 2017. It appears, therefore, that foreign source dividends should be excluded from the Kentucky tax base.
The combined reporting provisions under HB 487 were a surprise. The bill language does not specifically address several potential issues regarding how the combined report is to be prepared, including issues around apportionment and usage of attributes and net operating losses.